1. Field of the Invention
The present invention relates to the field of financial markets. More particularly, the invention relates to the trading of financial instruments, such as futures contracts, options contracts, forward contracts, or spot contracts, whose underlying assets may include rates, bonds, commodities, currencies, energy, equities, interest rates, or metals.
2. Related Art
Financial markets support trading in multiple financial instruments. The central dynamics of the market in which each instrument operates and trades will depend upon the individual characteristics of the instrument.
All markets which provide a periodic or continuous auction for the matching of buy orders and sell orders through a central order book employ a trading algorithm which prescribes how matching occurs. As markets have adopted electronic trading, in their move from the traditional exchange trading floor to the screen, exchanges have sought to electronically replicate the characteristics present in the trading floor environment. Furthermore, the adoption of electronic trading has enabled and continues to enable further development of such auction-based functionality.
In the exchange-based derivative markets, traders of equity derivative instruments have become accustomed to a time priority algorithm, in which orders of the same price are prioritized for matching according to the time they entered the central order book.
Certain exchange-traded interest rate derivative contracts, such as, in particular, short term interest rate (“STIR”) contracts, such as Short Sterling, Euribor and Eurodollar futures, reflect interest rate expectations stretching out several years in periodic, often quarterly, intervals. Interest rate expectations over time may be reflected graphically by what is known as the yield curve. Individual movements along each point of the yield curve can often be subtle, as the market establishes its expectations of future interest rates. As a consequence, the trading algorithm employed when exchange trading moved from floor to screen was designed to extract maximum liquidity from a market with these characteristics. Accordingly, the major STIR markets have employed a volume pro-rata algorithm, which is designed to distribute trading opportunities amongst a greater number of traders, thus encouraging wider participation and henceforth greater levels of liquidity in the market.
As electronic markets have evolved, access has become easier and more cost effective, and contracts which were traded on a single trading floor of one of the London or Chicago exchanges are now available globally through an electronic trading screen. As a result, traders have access to multiple markets through a single screen and are able to seek the most liquid instruments, given any particular global macro-economic circumstance. In response to this evolution in electronic markets, exchanges have found that the traditional characteristics that originally governed the dynamics of the floor based markets, and their early electronic replacements, also need to evolve. This evolution will ensure that the market maximizes opportunities for as wide a range of market participants as possible, regardless of their respective heritages as traders. In order to remain competitive, exchanges need to be in a position to rapidly respond to evolutions in the marketplace. This includes developing an ability to rapidly adapt the characteristics of the trading algorithm to suit new market dynamics and to accommodate new market participants. Accordingly, the present invention is intended to address this problem.